Dell looking to expand beyond PCs

ANDREW VANACORE, ASSOCIATED PRESS

Published 5:30 am, Monday, September 21, 2009

Dell will spend $3.9 billion for another Texas business, the technology services company Perot Systems Corp., in an attempt to expand beyond the PC business and compete more aggressively with Hewlett-Packard Co., which recently bought another tech-services company founded by H. Ross Perot.

Dell said Monday it will offer $30 per share in cash for Perot Systems — a 68 percent premium over its closing price Friday. Perot Systems' shares rose $11.65, or 65 percent, to close at $29.56.

Dell shares fell 68 cents, or 4.1 percent, to $16.01.

Former presidential candidate H. Ross Perot Sr., 79, serves as chairman emeritus of Perot Systems, which he founded in 1988. According to an April regulatory filing, Perot and related trusts controlled at least 25 percent of the company's stock, though the beneficiary of those shares was not clear. The company did not respond to a request for comment on Perot's stake.

Perot had already made a fortune from founding Electronic Data Systems Corp. in 1962 and selling it to General Motors Corp. in a 1984 deal worth $2.5 billion. Hewlett-Packard bought EDS last year for $13.9 billion as it, too, tried to augment its services offerings and diversify beyond hardware.

In a conference call with analysts, Dell's founder and CEO, Michael Dell, said Perot Systems will serve as an “anchor” acquisition for a global information-technology services business.

Plano-based Perot Systems would bring Dell more than 1,000 customers, including the U.S. military and the Department of Homeland Security. About 48 percent of Perot Systems' revenue comes from the health care industry and 25 percent from government. Last year Perot Systems earned $117 million on sales of $2.8 billion.

Round Rock-based Dell's services business is more basic than those of its larger competitors, and its revenue comes mainly from the hard-hit PC business. As a result Dell's profits have been slumping, down 23 percent in the second quarter.

Perot Systems would add consulting and other kinds of computing services, such as “systems integration,” to Dell's lineup.

“This would, at least from a product standpoint, put them definitely more competitive with HP and IBM,” Kaufman Bros. analyst Shaw Wu said. “It's a step in the right direction.”

Wu said Dell's hardware business could benefit from exposure to Perot Systems' customers, while Dell's broader services line may look more attractive to customers seeking one provider for multiple technology needs. Combining the businesses could also help Dell find new ways to cut costs.

However, Dell's tech-services business would still be relatively small; EDS had revenue of $21 billion before HP bought it. IBM Corp.'s services revenue was $59 billion last year.

Nor will the acquisition give Dell much of an international presence in services. “If they're really going be strategic in services, they're going to need a footprint that's more global than Perot,” Jefferies & Co. analyst Joseph Vafi said.

Analysts have been expecting acquisitions from Dell, which hired IBM's former mergers and acquisitions chief this year and has raised almost $1 billion by selling debt securities since March.

HP and Dell are reaching out beyond PCs — a business IBM exited in 2004 — because it's getting harder and harder to make money there. The recession, fierce competition, fluctuating prices for components like memory chips and display panels, and a shift to cheaper little laptops called netbooks have all hurt PC makers' profit margins. HP's PC and services businesses have roughly the same revenue, but the services operation had three times as much profit in the past nine months.

After the acquisition, which is expected to close by the end of January, Perot Systems would become Dell's services unit. Dell said it expects additional acquisitions to expand on the business but emphasized that it is looking to hold on to Perot management, including CEO Peter Altabef.

Ross Perot Jr., the chairman of Perot's board, will be considered for a director slot at Dell, the company said.